Russian Budgetary Contortions

Russian Prime Minister Dmitry Medvedev is hoping for a budget that will provide for all social expenditures regardless of the circumstances, Russian daily Vedomosti reports. He stated that the Government shouldn’t expect positive developments on the commodities market, where Brent crude traded at around USD 50 per barrel this week. Russian Ministry of Finance based this year’s budget on the average price of USD 40 per barrel and a deficit of 3% of GDP.

Prime Minister’s demands to fully provide for social expenditures might collide with the Finance Minister’s recommendation to keep the budget deficit under 3% of GDP in order to keep the interest expenditures under control. The Ministry is preparing recommendations for budget restructuring and better management, as well as the reduction of expenditures. Earlier, Mrs. Natalia Akindinova of the Higher School of Economics suggested that the most probable scenario for cutting budgetary expenditures is keeping its nominal value unchanged and letting the inflation erode its value in real terms. And while social expenditures increased faster than other outlays in the last seven years, some government officials don’t think they can be reduced.  The Government might give up on its plan to peg the growth of pensions to the expected inflation in 2017 (6.5% according to the Ministry of Economy) and suspend the respective law as it did in 2016, when pensions increased by mere 4% and failed to keep up with the inflation of 12.9%.  Pensions and taxation of the oil and gas industry are among the contentious issues that get in the way of putting together the budget for the next three years.  As it is difficult to cut social expenditures close to elections, all unpopular decisions will likely be postponed until 2018.  According to Mr. Vladimir Tikhomirov of BKS Bank, they might include rising of taxes, reduction of government administration and cutting of subsidies.

Slon Magazine writes about the two reserve funds at the Russian Government’s disposal – the Reserve Fund and the National Wealth fund with total assets of USD 112 billion, or approximately 9.3% of Russia’s GDP. Given that the budget deficit in the first four months of 2016 amounted to 4.7% of GDP, this doesn’t sound like much.  Should the price of oil drop to USD 25 per barrel, Russia will have depleted the reserve funds by 2019.  According to Standard&Poors, Russia’s government debt should reach 18% of GDP in 2020 – still far less than in most western countries.



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